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Basis. Short hedge-Spot 1 : Rs 100 Spot 2: 85 Futures 1: Rs102 Futures 2:Rs87 When basis strengthens –Gain ? When basis weakens –Loss? Long hedge –Spot 1:Rs.200 Futures 1-Rs.203 Spot 2:Rs.240 Futures2:Rs243 Why spot price= future price @ expiry? Arbitrage opportunity.

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basis
Basis
  • Short hedge-Spot 1 : Rs 100

Spot 2: 85 Futures 1: Rs102 Futures 2:Rs87

When basis strengthens –Gain ?

When basis weakens –Loss?

  • Long hedge –Spot 1:Rs.200 Futures 1-Rs.203 Spot 2:Rs.240 Futures2:Rs243
  • Why spot price= future price @ expiry? Arbitrage opportunity

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contract specifications stock futures
Contract specifications –stock futures
  • -Nov,2001
  • Contract-underlying securities /S&P CNX Nifty
  • Exchange-NSE
  • Security descriptor –N FUTSTK
  • Contract size-as specified by exchange- Rs.2 lakh
  • Price steps-.05* respective lot size
  • Trading cycle-three month trading cycle

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contract specifications stock futures1
Contract specifications –stock futures
  • Near month(one); next month(two); far month(three)-New contract will be introduced on next trading day following the expiry of near month contract
  • Expiry day-last Thursday of the expiry month/previous trading day if the last Thursday is a trading holiday

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open interest and settlement price
Open interest and Settlement price
  • Open interest:-Outstanding positions in the contract at that point of time and Liquidity of the contract . Next video

Closing out position –easier at when open interest is high and vice versa

Settlement price:-average of the prices at which the contract is traded-NSE: average price of Last half an hour and when trade is not taking place –theoretical price will be taken to consideration

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open interest
Open Interest

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key advantages major types
key advantages &Major types
  • Key advantages
  • Highly liquid market-easy to open and close position
  • Gearing-buying large exposure with the help of 10% of the total exposure
  • Long futures –buying futures –Bullish
  • Short futures –selling futures –Bearish

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features geared instruments
Features Geared instruments
  • Facilitates to buy the large exposure with small outlay is known gearing process
  • Futures to trade without owning stocks
  • Futures are used as hedging instruments
  • Futures for portfolio adjustments

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gearing process example
Gearing process –example
  • Share A is currently priced Rs.100 and the December future on that share is priced at Rs.102
  • A few days later the share price has risen to Rs.110 and the future has risen to Rs.112

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futures features
Futures-Features

Futures to trade without stocks

Futures-Pairs(Spread) trading

To take position on relative performance of two shares –pairs trading

Studying the movement of prices of two stocks –entering into the futures

Determiining the net gains

  • Moving out of the existing futures by entering into counter positions

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futures pairs trading
Futures –Pairs Trading
  • Investor thinks that A will outperform the B stock over the next few months . He buys 2 futures of A and sells 3 futures of B (1000 shares)

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port folio adjustments
Port folio adjustments
  • Assume investor holds 10,000 shares of A . B is considered as outperforming stock over the A stock. (futures-1000)
  • He sells 10 futures of A and buys 13 futures B

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maintenance margin
Maintenance margin
  • Maintenance Margin – to support the daily settlement process “mark to market”-losses already are collected
  • Initial margin- to safeguard against potential losses on outstanding positions.
  • Maintenance margin-75-80% of initial margin – adequate cash resources should be deposited –transactions will be with held- to maintain the margin shorting is done and profits are realised and set the balances in the margin deposit and the remaining are withdrawn by the investor

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marking to market
Marking to market
  • - to evade credit risk – margin is maintained by the exchange- from the players- to overcome counterparty risk.
  • -Contract is marked to its present market value.
  • On every day- contract is marked to market
  • Trader vs Exchange
  • If trader earns profit- exchange is liable-profit will be credited
  • Unless otherwise vice versa

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variation margin
Variation margin
  • To restore the initial margin- through margin call from the exchange

Exercise

On November 15, the spot price for Telco is Rs.473 per share , Mr. X buys 15 contracts of Jan Telco futures of Rs.491.Assume that initial margin is Rs.800 per contract and the maintenance margin is Rs.600 per contract .Given the each contract 50 shares .Daily settlement of prices are given

Nove15 Rs.496;Nove16 Rs.503; Nove 17 Rs.488; Nove 18 Rs.485; Nov19 Rs.491

November16th Mr.X withdraws the profit from the maximum allowed on Nov16 and half the maximum amount allowed

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arbitrage pricing of futures
Arbitrage – Pricing of futures
  • Borrowing Rs 100
  • Buying of shares

Rs.100

Interest rate Rs.6

Dividends Rs.2

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arbitrage pricing of futures cash and carry
Arbitrage – Pricing of futures-cash and carry

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pricing of futures
Pricing of futures
  • Cost of carry=?????
  • Fair value=?????
  • When will be the risk less profit –sell futures ?
  • Premium=?
  • Components of premium=?
  • Early future contract slides…

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pricing of futures reverse cash and carry
Pricing of futures-Reverse cash and carry

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currency futures introduction to currency market
Currency futures –Introduction to currency market
  • Type of currencies –Base and counter currencies
  • USD-INR
  • GBP-INR
  • Japanese yen –USD
  • First currency – Base currency
  • Second currency – Counter /terms /qoute currency

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exchange rate regimes
Exchange rate regimes

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fixed and floating exchange rates
Fixed and Floating exchange rates
  • Govt action towards buying and selling of domestic currency-in open market
  • Buying at value is coming down
  • Selling at value is going up
  • Self correcting mechanism
  • Demand and supply of the currency
  • Demand for currency is low-import is costlier and export is cheaper
  • When exports- payment leads to appreciation of domestic currency

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factors exchange rates
Factors –Exchange rates
  • Fundamental factors : inflation, BOP, unemployment , capacity utilisation , trends in import and exports-BOP surplus- Favourable exchange rate and vice versa
  • Technical factors : Interest rates ,Inflation rate and Exchange rate policy
  • Political factors
  • Speculation-over valuation

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important reasons for rupee depreciation
Important reasons for Rupee Depreciation

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quotes
Quotes
  • Direct quote : in the expression of USD ;1USD =INR 45.000
  • Indirect quote : in the expression of terms currency ; 1INR=.021 USD

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tick size
Tick size
  • NSE tick size :.0025
  • Value of one on each contract =Rs 2.5
  • Example 4 ticks improvement and 5 contracts
  • Bid price – willing of the buyer to pay
  • Ask price- willing of the price to sell
  • Spread

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highlight forex futures contract
Highlight –Forex Futures Contract

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currency future contract cycle
Currency Future-Contract cycle

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contract specification
Contract specification
  • Last trading day :Two working days prior to final settelment
  • Settlement :Cash settlement
  • Final settlement price: The reference rate fixed by RBI two working days prior to the final settlement date will be used for final settlement .

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rbi reference rate
RBI Reference rate

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currency futures contract trading process
Currency futures contract trading process

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pricing of futures contract interest rate parity
Pricing of futures contract-interest rate parity
  • A theory in which the interest rate differential between two countries is equal to the differential between the forward exchange rate and the spot exchange rate. Interest rate parity plays an essential role in foreign exchange markets, connecting interest rates, spot exchange rates and foreign exchange rates.F/S= (1+Rh)/(1+Rf)
  • F=S *e(rh-rf)*r

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example problems
Example problems
  • Assume on March10,2002 annual interest rate was 10% p.a on indian rupees and US dollar was 7% per annum . The spot Re/$ exchange rate was 44 using the above futures ,calculate the theoretical futures price on one year forward exchange rate

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